Retirees To Hold Allen To Promise

Governor-elect Won Votes With Pension-tax Stance

December 12, 1993|By DAVID LERMAN Daily Press

For Charles E. Johnson, a retiree from NASA Langley Research Center, Gov.-elect George F. Allen's landslide victory last month meant more than vague notions of fiscal responsibility and better education.

The 70-year-old Hampton resident is hoping to recoup thousands of dollars in taxes the state illegally collected on his federal pension.

"I do think Gov. Allen is on our side," Johnson said. "He realizes that paying us is the right way to do it."

Allen promised during the campaign to settle a lawsuit affecting an estimated 200,000 federal retirees in Virginia who could be owed as much as $489 million. The U.S. Supreme Court ruled in June that Virginia's federal pensioners may be eligible for refunds of state taxes on their benefits that the high court declared unconstitutional four years ago.

So when Allen takes office next month, retirees say, they will be quick to remind him of his promise.

"People have not forgotten about it," said Ernest Kerekes, the Norfolk-Virginia Beach vice president of the National Association of Retired Federal Employees.

"We're hoping that with the promises that were made, a solution will be found and we can work out some payments."

If Allen tries to postpone any action, Johnson said, "We would do everything we could to change his mind."

Legislators said Friday they expect Allen to propose a payment plan that will be debated when the General Assembly convenes for its regular 60-day session beginning Jan. 12.

"I don't think there's any question we have to deal with it," said Del. Harry R. Purkey, R-Virginia Beach, a member of the House Finance Committee, who is serving on Allen's transition team.

"It has to be resolved one way or another. You just can't continue to sweep this stuff under the carpet forever."

Del. Alan A. Diamonstein, D-Newport News, a powerful budget negotiator, said of Allen, "I assume he will send a plan down to follow through on his campaign promise."

That promise will not come cheap. Refunding in full the federal pension taxes paid in Virginia between 1985 and 1988, as sought by retirees in their lawsuit, would cost the state enough to justify a 22 percent increase in the state sales tax or a 12 percent hike in income tax bills, according to calculations prepared for the suit.

But no one is advocating paying off the large sum in a single year. Allen, who has pledged not to raise the sales or income tax, has talked about devising tax credits that would reward retirees over several years until they recoup what they are owed.

Retirees are willing to negotiate, but only to a point, said Michael Kator, the attorney representing 421 retirees named in the suit.

"Some people need their money right away, and some could take their money over time," Kator said.

"We're flexible. But in terms of saying we'll take less than what we paid, I haven't spoken to any retiree willing to do that."

The suit stems from a U.S. Supreme Court ruling in a 1989 Michigan case that said a state cannot tax the pensions of federal employees if it doesn't tax state and local pensions as well. Virginia and 23 other states had exempted state and local pensions from taxation. Since that ruling, the General Assembly corrected the problem so that all pensions are treated equally.

While federal pensions had been taxed illegally for many years, the retirees could only sue for taxes paid in for four previous years.

Democrat Mary Sue Terry, the former attorney general who lost to Allen last month, contended that the 1989 ruling should not be applied retroactively. But the federal high court disagreed this year on a 7-2 vote.

Even so, the Supreme Court did not award any refunds. Instead, it sent the case back to the Virginia Supreme Court, which in turn referred the case back to an Alexandria Circuit Court. A ruling on whether refunds must be paid is expected as early as next month.

During her campaign, Terry maintained that the state could still win the case and not have to pay refunds. That stance cost her support among retirees that Allen was quick to tap.

"It played a big part in her defeat," said Kerekes, who voted for Allen. "She was adamantly opposed to the federal retirees getting any refunds."

Time and again on the campaign trail, Allen rallied retirees to his camp. "My view is we ought to settle this case," he said. "My opponent wants to sweep it under the rug."

Allen has said the state is likely to lose the pending court decision and would do better to settle the case before a judge issues an order. Delaying a settlement, Allen has said, adds as much as $3.5 million a month in interest payments to the amount the state would owe retirees.

Purkey said administration officials are considering at least two options for paying off a settlement.

One strategy calls for tax credits awarded to federal pensioners over the next several years. Another option, he said, is a state bond issue that would allow for a faster payback to retirees but enable the state to repay the borrowed money over several years.

The settlement crunch comes at a time when the state already faces a projected shortfall in the next two-year budget of $267 million to $442 million, according to the latest estimates of the Senate Finance Committee.

So any money for federal retirees, officials warn, will be hard to come by next year. At the same time, elderly retirees may not be willing to wait very long to get their money back.

"Given the age group of these people, I think most of them will want the cash, not the tax credit," Purkey said.

"This is just another one of those time bombs that's out there. The meter is running right now."